Monday, February 11, 2013

tax predictions unreliable as matter of law

Brakke and other principals of Dealer Management Group sued
American General Life Insurance, Economic Concepts (EC), and other parties for
alleged misrepresentations about a pension plan.Defendants allegedly persuaded Brakke et al.
to establish the pension plan by representing that contributions were tax
deductible. Subsequently, the IRS determined that the pension plan didn’t
qualify for favorable tax treatment, resulting in back taxes and penalties. The
trial court rejected the claims for fraud, violation of the consumer protection
law, etc. on the pleadings, and the court of appeals affirmed.

Plaintiffs alleged that defendants told them that the plan
was legal and that contributions would be tax deductible.EC’s marketing materials said that EC “has
secured a letter opinion of ‘more likely than not’ from” a named law firm, and
“[a]ll participating employers in the ... [p]lan will receive an individual IRS
letter opinion approving the plan.”After 3 years, though, the IRS audited the plan and determined that it
failed to comply with certain requirements.Plaintiffs alleged that defendants knew that their statements were false
or had no reasonable ground to believe them to be true.

The trial court accepted the argument that the claims failed
as a matter of law because they were based on future predictions about tax law
on which plaintiffs couldn’t have justifiably relied.It wasn’t until 2004, after plaintiffs established
the plan, that the IRS declared such plans unlawful.

The plans at issue required careful design to comply with
the law, and the 2004 IRS ruling was designed to clear up ambiguities that had
developed.As a matter of law, 2004
rulings couldn’t be used to show that earlier statements were false when
made.Berry v. Indianapolis Life Ins. Co.,
638 F. Supp. 2d 732 (N.D. Tex. 2009) (rejecting claims similar to these).

There are exceptions to the general rule that
misrepresentations are only actionable if they relate to existing fact, not to
opinions or predictions.These
exceptions are “(1) where a party holds
himself out to be specially qualified and the other party is so situated that
he may reasonably rely upon the former's superior knowledge; (2) where the
opinion is by a fiduciary or other trusted person;(3) where a party states his opinion as an
existing fact or as implying facts which justify a belief in the truth of the
opinion.”However, as Berry held, it’s inherently unreasonable
for anyone to rely on a prediction of future IRS enactment, enforcement, or
non-enforcement of the law from someone who isn’t affiliated with the US
government.

Plaintiffs argued that, based on earlier IRS administrative
materials, they could show that the IRS had long criticized many of the
features that characterized their plan, and could amend their complaint to
allege that the IRS had begun scrutinizing plans similar to theirs.Thus, they argued, defendants shouldn’t have
emphatically promised tax deductibility. The court of appeals didn’t agree.The IRS documents mentioned failed to provide
definitive guidance and didn’t support the idea that the defendants knew their
representations were false when made.

Although the UCL only requires likely deception, deception
requires that the public have had an expectation or assumption about the matter
in question. Absent a duty to disclose, failure to disclose doesn’t support a
UCL claim.Given EC’s representations
about the “more likely than not” qualification for favorable tax treatment,
plaintiffs couldn’t allege that they could reasonably expect or assume that the
IRS would never disqualify their plan or revise its interpretation of the tax
laws, or that EC would have a duty to tell clients about a possible future change
in tax law.

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